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Seeking Ortho

 Look for healthcare reform to boost short term profits in orthopedic parts companies.  In fact, these companies should beat 3Q estimates.  These statements sound like a paradox. How can healthcare reform help a medical parts manufacturer?   The simple answer is fear.  Fear has ousted greed, as the number one force, in these unprecedented times.  Never underestimate the motivational power of fear. The fear of oppressive tax hikes, and the fear of government intervention are guiding new corporate policies. Medical boardrooms across the country are using healthcare reform to streamline production and increase sales.

With the incorporation of lean manufacturing, combined with temporary staffing agencies, the ortho companies are in the sweet spot, for reducing payroll costs.    Lean manufacturing allows companies to track production rates, and quality control, down to the individual. If the rate of production does not meet preset standards and/or there is a lack of quality in workmanship, that particular individual will find themselves looking for employment elsewhere.   These stringent guidelines suggest that it would be difficult to find laborers to fill these positions.

Enter staffing agencies. Temporary employment agencies are the loophole to healthcare benefits, and competitive wages.  Now companies can interchange the high wage, high benefits worker, with the inexpensive, expendable worker.   Quality and production are still relatively controlled, during the arduous process of constantly hiring new employees. The standard is maintained because of lean manufacturing, which allows employers to shuffle employees, much like a puzzle.  Running LEANer and meaner, are certainly ingredients for a nice earnings report, but what about sales growth. 

There are a couple of drivers, for sales growth, in the orthopedic parts industry.  One is the sales pitch, to the hospitals and the surgeons around the world.  The pitch would go something like this; “ It would behoove you to stock up on parts, before health care reform dramatically increases downstream costs.  Just think of all the alpha you will be saving , by buying all of these parts NOW.” Etc., etc., etc..  But I digress, to focus on a different driver for sales growth.

As economies around the world begin to grow, the standard of living will increase.  More people will have the means to undergo artificial body parts replacement. Therefore, companies with overseas exposure are strategically positioned to make the most of the opportunity.  Many of these companies already have international customers.  The advantage, for companies with international exposure, lies in the transformation of the concept of a global economy . The concept of a global economy has gone from an idea to a reality.  Items as simple as established travel routes, trade routes, lines of communication, networking connections, and documentation resolution are creating a more efficient global environment.  Improved efficiency equals improved margins in the corporate world.  Obviously the global economy transformation is not complete, however, companies with international exposure, should be benefitting from increased sales growth.   

Now that we have a scenario for cost savings in production, coupled with increased sales , we can explore what to do with our information.  There are two areas to be focusing on, in the ortho parts industry group. Area one is to make a little coin. I did say a little. For trading equities , a buy the rumor sell the news approach would be prudent for going long. I would be looking to take profits with modest gains.

For trading options, buying a call spread or selling a put spread would be prudent.  Monitoring implied volatility will tip one off to a favorable offering. Use historical volatility and technicals to help pick your strikes.  Also, many of the earnings reports will fall close to Oct. expiration, creating another interesting aspect to the trade.

CNMD is revealing some interesting volume clues to what the third quarter earnings report might hold.

(NASDAQ:CNMD) is setting up for a buy, if it approaches the twenty dollar mark, before earnings comes out around October 18th.  Obviously the macroeconomic
picture will have to be reevaluated at that point. The selling point should come as the stock price approaches twenty two dollars. Look for a little help from the 7% short interest to help push the twenty two dollar mark.

  Now that I have tried to sell you on the trade, or maybe convince myself, let us get to the gold nugget just waiting to be unearthed.  The second area to focus on, and by far the more important, is the glimpse in to the future.  Earnings reports and guidance will provide a template for evaluating the current condition and the future condition of the economy, for those who are able to read between the lines.  The orthopedic parts companies are a microcosm of the uncertainty in the market place.  The unknowns of healthcare reform, the unknowns of future tax policies, conflicting and shifting data on the consumer, and cutting costs until there is no room for error are all variables affecting these companies.  In my estimation, 3Q earnings are the first data point to deciphering what a global economy means to corporate America, and to America’s economy in general.

Many investors are discouraged about the lack of historical data relevant to the challenges we face , in our current economy. Trying to use the great depression or Japan’s stagnant economy, as models for leading indicators, has not proven useful.  The orthopedic parts industry is on the frontlines of the new normal.   Hopefully, investors will be encouraged, by the relevant historical data waiting to be laid out in the near future.

Disclosure: No positions